Oil prices and consumer spending.
With the recent surge in oil prices I thought it would be useful to look at the potential impact with one set of data I watch. It is energy as a share of personal consumption expenditures or consumer spending. In the 1970s energy consumption rose from about 6% to 9% of spending, or about 50%. In the early 2000s energy rose from about 4% to 7% of consumer spending before it collapsed. As of December energy’s share of consumer spending was already back to 6% of spending, about the level it peaked at in the last cycle before the financial panic generated a drop in other consumer spending. If you look at energy consumption this way it appears that oil consumption was already at the point where futher oil price increases would rapidly impact consumer spending on other items.
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One area where higher oil prices clearly impacts consumer spending is autos, as consumer spending on new and used autos and energy have a very strong negative correlation. If rising oil prices generate a drop in real income or standard of living one of the easiest way to compensate is to delay buying a new,or used car. What would have been new monthly auto payments can be used to sustain consumption of other items. In this chart you can clearly see that this happened in both the 1970s and the 2000s. You can also see that spending on energy and autos accounted for about 10% of consumer spending in the 1990s and 2000s.
But the chart also shows that auto consumption was only about 3.5% of consumer spending at the end of 2010 as compared to a 5% to 5.5% norm in the 1990s and 2000s economic expansions. So the consumer does not really have the option to cut back on auto consumption like they did in the previous examples of oil price spikes. These charts suggest that if oil prices remain high or expand well past $100 we are quite likely to see consumer spending suffer across the board. Note that this chart of spending is based on nominal dollars.
Also note that Brent crude is already about $120 while West Texas Intermediate — the US base price — has only increased to about $100. This apparently is due to excess supplies in the Midwest because of a new oil pipeline from Canada. Such a divergence can only last so long, so that if oil supplies are interrupted for very long you can expect West Texas Intermediate to close on the Brent price fairly rapidly.
Just an anecdotal observation:
In the SF Bay Area, the effect of the oil spike in ’08 was quite noticeable on local traffic. Traffic was sparse, except for commutes. Now prices have climbed to about 90% of what they were then, but traffic is holding up. That is a good sign, I suppose. But I look forward to higher prices this summer. đ I plan to rely more upon public transportation.
“”we are quite likely to see consumer spending suffer across the board.”
The average consumer spends money as he or she earns it. Consumer spending won’t suffer in the aggregate, it will just shift into necessities (like gas and food) and away from discretionary spending. That will hurt industries that sell discretionary consumer good and will likely lead to more layoffs.
This is how you create stagflation (what I call screwflation), which is clearly what the Fed and Wall Street want. Stagflation creates a political climate where people demand and accept change that is actually bad for them, just like what happened in the 1970s.
something else interesting from the WSJ:
FedExÂs Inconvenient Truth – FedEx Chief Executive Officer Fred Smith and Gen. Charles Wald, who helped plan the 1986 attack on Libya, used growing Middle East unrest to push the Obama administration and Congress to forge ahead on legislation to reduce U.S. dependence on foreign oil. But an inconvenient fact emerged during a conference call with reporters: Of the 75,000 trucks in the FedEx fleet, only 20 are electric and 350 are hybrids, Mr. Smith said. The company, he went on to explain, passes on increases in fuel costs through surcharges, and doesnât hedge on oil prices, so fuel costs are not a big weight on its balance sheet. Gen. Wald had some interesting statistics of his own: The 2008 hike in the price of oil cost the Pentagonâwhich consumes 2% of all U.S. oil suppliesâ$11 billion. The war in Afghanistan consumes 22 gallons of fuel per soldier per day, at a price of $400, due to the cost of security. Every $10 increase on the price of a barrel of oil, he said, will add $1.3 billion to the Pentagonâs budget.
 Note also that WMT has reported lower sales citing ” … lower demand from low-income shoppers …”  among other things. Demand destruction on account of increased gas prices is probably already happening. This phenomenon will just rise the ‘income ladder’ to higher income groups, as the pump prices increase.Â
Heating oil in NE is almost $4 a gallon, a big chunk of change for many to have heat as well.
That`s not great news.If the fuel is more expansive we can let our cars in the garage,especially if you have problems with it.My car is broken and the auto parts are very expansive.I was searching on http://www.asedeals.com for cheap auto repair company.